Chapter 5, Solutions Cornett, Adair, and Nofsinger

FV = $1,000 × (1 + 0.06)5 + $1,200× (1 + 0.06)4 + $1,200 × (1 + 0.06)3 + $1,500× (1 + 0.06)2

FV = $1,338.23 + $1,514.97 + $1,429.22 + $1,685.40 = $5,967.82

LG15-18 Future Value Given a 7 percent interest rate, compute the year 6 future value of deposits made in years 1, 2, 3, and 4 of $1,000, $1,300, $1,300, and $1,400.

Use equation 5-1:

FV = $1,000 × (1 + 0.07)5 + $1,300× (1 + 0.07)4 + $1,300 × (1 + 0.07)3 + $1,400× (1 + 0.07)2

FV = $1,402.55 + $1,704.03 + $1,592.56 + $1,602.86 = $6,302

LG25-19 Future Value of Multiple Annuities Assume that you contribute $200 per month to a retirement plan for 20 years. Then you are able to increase the contribution to $400 per month for another 20 years. Given a 7 percent interest rate, what is the value of your retirement plan after the 40 years?

Break the annuity streams into a level stream of payments of $200 for 40 years and another level stream of payments of $200 for the last 20 years. Use equation 5-2 for each payment stream and add the results:

LG25-20 Future Value of Multiple Annuities Assume that you contribute $150 per month to a retirement plan for 15 years. Then you are able to increase the contribution to $350 per month for the next 25 years. Given an 8 percent interest rate, what is the value of your retirement plan after the 40 years?

Break the annuity streams into a level stream of payments of $150 for 40 years and another level stream of payments of $200 for the last 25 years. Use equation 5-2 for each payment stream and add the results

LG35-21 Present Value Given a 6 percent interest rate, compute the present value of payments made in years 1, 2, 3, and 4 of $1,000, $1,200, $1,200, and $1,500.

Use equation 5-3:

PV = $1,000 ÷ (1 + 0.06)1 + $1,200 ÷ (1 + 0.06)2 + $1,200 ÷ (1 + 0.06)3 + $1,500 ÷ (1 + 0.06)4

PV = $943.40 + $1,068 + $1,007.54 + $1,188.14 = $4,207.08

LG35-22 Present Value Given a 7 percent interest rate, compute the present value of payments made in years 1, 2, 3, and 4 of $1,000, $1,300, $1,300, and $1,400.